Based upon a couple of recent rulings, the insurance coverage lawyers at Michelman & Robinson, LLP anticipate that additional courts may give a broader meaning to the phrase “direct physical loss” as it applies to insurers' business interruption coverage responsibilities stemming from COVID-19-related losses.
By way of background, many businesses have suffered financially due to the fallout from the novel coronavirus, particularly in the wake of various government shutdown orders made across America as a result of the pandemic. In response, some businesses have turned to their insurance policies that provide coverage for lost profits (read: their business interruption coverage).
However, such coverage under most business property policies only comes into play in the event of “direct physical loss” to property. Another challenge for insureds is that typical business interruption policies include virus exclusions. Consequently, carriers have routinely denied coverage on COVID-19 business interruption claims, concluding that the novel coronavirus (1) did not cause direct physical loss to business property and (2) fits squarely within the applicable virus exclusion.
Almost all courts (except for one in North Carolina referenced below) have upheld these insurers’ coverage denials. But in the recent case of Valley Lodge Corporation v. Society Insurance Company, a United States District Court in Illinois ruled that the phrase “direct physical loss of or damage to” property did not require physical damage to a structure. Instead, because the policy there at issue included the phrase “loss of,” the court held that loss of use of the property was sufficient to potentially trigger coverage.
Of note, the ruling was made in the context of a motion to dismiss, and the court was careful to explain that a jury could conclude differently. Nonetheless, the judge allowed the insureds to proceed with their case against Society Insurance Company. Parenthetically, the policy in Valley Lodge Corporation did not include a virus exclusion, which could have led to a different outcome.
The ruling in Illinois is similar to the aforementioned North Carolina case, North State Deli LLC v. The Cincinnati Insurance Co. In that litigation, a superior court judge determined that North State Deli was entitled to its lost profits caused by COVID-19 because a reasonable interpretation of “direct physical loss” was “an inability to utilize…something in the real, material or bodily world, resulting from a given cause,” and that such a loss need not cause physical alteration of a business structure.
Taking these two cases together, it appears that more and more courts may characterize the meaning of “direct physical loss” to result in coverage for lost profits under policies of business interruption insurance. To be sure, they signal that the precise policy language in question is critical to any coverage inquiry. That being said, should you have any insurance or COVID-19-related concerns, feel free to contact M&R and its insurance law specialists and COVID-19 Practice Group for assistance.
This blog post is not offered, and should not be relied on, as legal advice. You should consult an attorney for advice in specific situations.